The Tax Court held that the method under Code Sec. 170(f)(8)(D) for substantiating a charitable contribution through reporting by the donee organization was not applicable because the IRS had not yet issued regulations effectuating the provision. Several judges dissented, noting that the IRS's failure to provide regulations should not render the provision inoperative. 15th West 17th Street LLC v. Comm'r, 147 T.C. No. 19 (2016).

Background

In September 2005, 15th West 17th Street LLC (LLC) purchased for $10 million two parcels of property in New York City. The LLC is taxed as a partnership for federal tax purposes. On one parcel was the Van Tassell & Kearney Auction Mart (VTK Building). The VTK Building was built in 1903 1904 for staging horse auctions. LLC originally planned on demolishing the VTK Building but an historic preservation society successfully lobbied to have the building placed on the National Register of Historic Places, and it thus became a "certified historic structure."

On December 20, 2007, LLC executed in favor of the Trust for Architectural Easements (Trust) a historic preservation deed of easement. This deed granted the Trust a perpetual conservation easement over one parcel of the property, including the VTK Building. The Trust is a Code Sec. 501(c)(3) organization and, on May 14, 2008, the Trust sent LLC a letter acknowledging receipt of the easement. This letter did not state whether the Trust had provided any goods or services to LLC, or whether the Trust had otherwise given LLC anything of value, in exchange for the easement.

The LLC secured an appraisal concluding that, as of February 8, 2008, the property had a fair market value of $69,230,000 before placement of the easement. The appraisal thus opined that the property acquired for $10 million in September 2005 had risen in value by almost 600 percent in 2-1/2 years. Opining that the property was worth only $4,740,000 after the donation, the appraisal concluded that the easement had reduced the property's value by $64,490,000. On its 2007 partnership return, LLC claimed a charitable contribution deduction of $64,490,000 with respect to the easement contribution. LLC included with its tax return a copy of the appraisal report, a copy of the Trust's May 14, 2008, letter, and Form 8283, Noncash Charitable Contributions, executed by the appraiser and by a representative of the Trust.

On August 19, 2008, the Trust filed Form 990, Return of Organization Exempt From Income Tax, for calendar year 2007. On that return, the Trust did not report the receipt of a charitable contribution from the LLC. Nor did it report whether it had provided any goods or services to LLC in exchange for the easement. Upon auditing LLC's 2007 tax return, the IRS disallowed the charitable contribution deduction in full because LLC had not met the applicable substantiation requirements of Code Sec. 170 and the related regulations for noncash charitable contributions.

On November 2, 2011, the LLC petitioned the Tax Court for a review of the IRS's disallowance of the charitable deduction. On June 16, 2014, the Trust prepared an amended Form 990 for 2007, which summarized the easement donations it had received during 2007. On the amended Form 990 filed in 2014, the Trust added the following two sentences to that description: "One of the New York donations received during 2007 included the donation by 15 West 17th Street LLC of an Historic Preservation Deed of Easement . The Trust provided no goods or services to 15 West 17 Street LLC in consideration for its donation of the Historic Preservation Deed of Easement."

Analysis

Code Sec. 170(f)(8)(A) provides that no deduction is allowed for any charitable contribution of $250 or more unless the taxpayer substantiates the gift by a contemporaneous written acknowledgment (CWA) from the donee organization. The CWA must state (among other things) whether the donee provided the donor with any goods or services in exchange for the gift. Code Sec. 170(f)(8)(B) provides that the CWA must state (among other things) whether the donee supplied the donor with any goods or services in consideration for the gift and (if so) must furnish a description and good-faith estimate of the value of such goods or services. However, Code Sec. 170(f)(8)(D) provides that this substantiation requirement does not apply to a contribution if the donee organization files a return, on "such form and in accordance with such regulations as the Secretary may prescribe," that includes the information specified in Code Sec. 170(f)(8)(B). To date, no regulations have been issued to implement the donee-reporting regime referred to in Code Sec. 170(f)(8)(D).

LLC filed a motion with the Tax Court for partial summary judgment. Before the Tax Court, the IRS advanced two arguments in opposition to LLC's motion. First, the IRS argued that Code Sec. 170(f)(8)(D) is not "self-executing," i.e., it will become operative only when the IRS publishes the regulations to which the statute refers. Since no regulations have been issued, the IRS contended that Code Sec. 170(f)(8)(A) remains applicable and that a proper CWA was necessary to substantiate LLC's contribution. Alternatively, the IRS argued, if the Tax Court determined that Code Sec. 170(f)(8)(D) is operative in the absence of regulations, then the term "return" as used in Code Sec. 170(f)(8)(D) referred to the donee organization's original return for the period in question and cannot include an amended return.

The Tax Court held that the authority delegated in Code Sec. 170(f)(8)(D) is discretionary, not mandatory, and that Code Sec. 170(f)(8)(D) is not self-executing in the absence of regulations. The court thus concluded that the general rule set forth in Code Sec. 170(f)(8)(A), requiring a CWA meeting the requirements of Code Sec. 170(f)(8)(B), was fully applicable for the easement contribution. The court denied LLC's motion for summary judgment.

Several judges dissented from the majority opinion, observing that while the IRS has not issued regulations to implement the donee-reporting regime referred to in Code Sec. 170(f)(8)(D), the statute makes no mention of regulations to implement such a regime. According to the dissent, the first clause of Code Sec. 170(f)(8)(D) establishes whether Code Sec. 170(f)(8)(A) applies when the donee organization files a return, and the second clause merely establishes that the IRS may provide alternative rules detailing how a donee organization may file such a return.

Citing the Tax Court's decision in Francisco v. Comm'r, 119 T.C. 317 (2002), the dissent noted that the IRS's failure to create such rules and issue new forms does not render Code Sec. 170(f)(8)(D) inoperative. Indeed, the dissent said, "we have frequently held that the Secretary may not prevent implementation of a tax benefit provision simply by failing to issue regulations." In the absence of regulations from the IRS, the dissent concluded, a donee filing a return that contains the information described in Code Sec. 170(f)(8)(B) satisfies the requirements of Code Sec. 170(f)(8)(D).

For a discussion of the charitable contribution substantiation rules, see Parker Tax ¶84,190.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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